Managerial Economics (Set 2)

ASSIGNMENT

Q.7) what is pricing policy? What are the internal and external factors of
the policy?

Ans:-

Pricing Policy
Pricing policy refers to the policy of setting the price of the product or products and
services by the management after taking into account of various internal & external
factors, forces and its own business objectives.

Internal Factors

I. Objective of the firm.

II. Production costs.
III. Quality of the product & its characteristics.
IV. Scale of production.
V. Efficient management of resources.
VI. Policy towards percentage of profits & dividend distribution.
VII. Advertising & sales promotion policies.
VIII. Wage policy & sales turn over policy etc.
IX. The stage of the product on the product life cycle.
X. Use pattern of the product.

External Factors

I. Demand, supply and their determinants.

II. Elasticity of demand and supply.
III.Degree of competition in the market.
IV. Size of the market.
V. Good will, name, fame and reputation of a firm in the market.
VI. Trends in the market.
VII. Purchasing power of the buyers.
VIII.Bargaining power of customers.
IX. Buyer’s behavior in respect of particular product.
X. Availability of substitutes & complements.

Q.8) Mention three crucial objectives of price policies.

Ans: - A firm has multiple objectives today. In spite of several objectives, the
ultimate aim of every business concern is to maximize its profits. In this context,
setting an ideal price for a product assumes greater importance. While
formulating the pricing policy, a firm has to consider various economic, social,
political and others factors. The following objectives are to be considered while
fixing the prices of the product.
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I) Profit maximization in the short term:-
 Maximum profit refers to the highest possible of profit. It may follow skimming price
policy, i.e., charging a very high price when the product is launched to cater to the needs
of only a few sections of people. Alternatively, it may adopt penetration pricing policy i.e.
charging a relatively lower price in the latter stages in the long run so as to attract more
customers & capture the market.

II) Profit optimization in the long run:-

Optimum profit refers to the most ideal or desirable level of profit. The traditional
profit maximization may not prove beneficial in the long run. With the sole motive of profit
making a firm may resort to several kinds of unethical practices like charging exorbitant
prices, follow monopoly trade practices, restrictive trade practices and unfair trade
practices etc. This may lead to opposition from the people. In order to over come these
evils, a firm instead of profit maximization, aims at profit optimization.

III) Price Stabilization:-

The price as far as possible should not fluctuate too after. Price instability creates
uncertain atmosphere in business circles. Sales plan becomes difficult under such
circumstance. Hence, price stability is one of the pre requisite conditions for steady &
persistent growth of a firm.

Q. 9) Mention the bases of price discrimination.

Ans:- The policy of price discrimination refers to the practice of a seller to charge
different prices for different customers for the same commodity, produced under a
single control without corresponding difference in cost.

The bases of price discrimination are:-

I) Personal difference:
This is nothing but charging different prices for the same commodity because of
personal differences arising out of ignorance and irrationality of consumers, preferences,
prejudices and needs.
II) Place:
Markets may be divided on the basis of entry barriers, for e.g. price of goods will be
high in the place where taxes are imposed. Price will be low in the place where there are
no taxes or low taxes.
III) Different uses of the same commodity:
When a particular commodity or service is meant for different purposes, different
rates may be charged depending upon the nature of consumption. For e.g. different
rates may be charged for the consumption of electricity for lighting, heating and
productive purposes in industry and agriculture.
IV) Time:
Special concession or rebates may be given during festival seasons or on important
occasions.
V) Distance:
Railway companies and other transporters, for e.g., charge lower rates per KM if the
distance is long and higher rates if the distance is short.

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VI) Special orders:

 When the goods are made to order it is easy to charge different prices to different
customers. In this case, particular consumer will not know the price charged by the firm
for other consumers.
VII) Nature of the Product:
Prices charged also depends on nature of products e.g., railways department charge
higher prices for carrying coal and luxuries and less prices for cotton, necessaries of life
etc.
VIII) Quantity of purchase:
When customers buy large quantities, discount will be allowed by the sellers. When
small quantities are purchased, discount may not be offered.

IX) Geographical area:

Business enterprises may charge different prices at the national and international
markets. For example, dumping- charging lower price in the competitive foreign market
and higher price in protected home market.
X) Discrimination on the basis of income and wealth:
For e.g., A doctor may charge higher fees for rich patients and lower fees for poor
patients.
XI) Peak season and off peak season services:
Hotel & transport authorities charge different rates during peak season and off – peak
seasons.

10) What do you mean by the fiscal policy? What are the instruments of
fiscal policy? Briefly comments on India’s fiscal policy.

Ans:- The term “fisc” in English language means “treasury” , and as such, policy related
to treasury or government exchequer is known as fiscal policy. Fiscal policy is a
package of economic measures of the government regarding its public expenditure,
public revenue, public debt or public borrowings.
In the words of Ursula Hicks, “ Fiscal policy is concerned with the manner in
which all the different elements of public finance, while still primarily concerned with
carrying out their own duties [as the first duty of a tax is to raise revenue] may
collectively be geared to forward the aims of economic policy”.

Instruments of Fiscal Policy are mentioned below:-

I) Public Revenue:
It refers to the income or receipts of public authorities. Taxes are the main source of
revenue to a government. Like – corporate & personal income tax, property tax,
expenditure tax, excise duties, sales tax etc. Administrative revenues are the bi-products
of administrate function of the government. They include fees, license fees, price of
public goods and services, fines, escheats, special assessment etc.
II) Public expenditure policy:
It refers to the expenditure incurred by the public authorities like central, state & local
governments. Like – development of basic industries, generation of electricity,
development of transport and communications, construction of dams, defense
expenditure, subsidies, interest payments & debt servicing changes etc.
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III) Public debt or public borrowing policy:

 All loans taken by the government constitutes public debt. It refers to the borrowings
made by the governments to meet the ever-rising expenditure. It is two types, internal
borrowings and external borrowings.
IV) Deficit financing:
It is an extraordinary technique of financing the deficits in the budgets. It implies
printing of fresh and new currency notes by the government by running down the cash
balances with the central bank. The amount of new money printed by the government
depends on the absorption capacity of the economy.
V) Built in stabilizers or automatic stabilizers:
The automatic or built in stabilizers imply automatic changes in tax collections and
transfer payments or public expenditure programmes so that it may reduce destabilizing
effect on aggregate effective demand.

India’s fiscal policy:

Fiscal policy has to play a positive & constructive role in India. The specific role to
be played by fiscal policy can be discussed as follows:

To act as optimum allocator of resources.

As most of the resources are scarce in their supply, careful planning is needed in its
allocation so as to achieve the set targets. Rational allocation would ensure fulfillment of
various objective.
To act as a saver.
Taxation policy has to be modified to raise the rates of old taxes, introduce new and
additional taxes, and extend the tax-net.
Profit earning capacity of public sector units are to be raise substantially to mop-up
financial resources.
The government should borrow more money both with in the country and outside the
country.
Higher rates of interests are to be offered for government bonds and securities.
Introduction and popularization of small saving schemes.
Introducing of various kinds of Insurance schemes.
To act as an Investor.
Rapid economic growth depends on the volume of Investment. Hence, fiscal policy has
to ensure higher volume of investment in both public & private sector.
To act as price stabilizer.
It act as a price stabilizer & control extreme levels of both inflation and deflation would
disrupt and disturb the normal and regular working of an economic system.
To act as economic stabilizer.
Price stability would create the necessary background for over all economic stability.
Upswings and downswings in the level of economic activities are to be avoided.
To act as an employment generator.
Fiscal policy should help in mobilizing more fiscal resources, convert them in to
investment and create more employment opportunities to absorb the huge
unemployment men power.

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To act as balancer.
Fiscal policy helps in maintain proper balance between aggregate saving and aggregate
investment, demand and supply, income, output and expenditure, economic over head
capital and social overhead capital etc.
To act as stimulator of living standards of people.
Fiscal policies raise the level of living standards of the people. This is possible when
there is higher output, income and employment leading to higher purchasing power in
the hands of common man. Hence, fiscal policy should help in creating more wealth in
an economy.
Thus, fiscal policy has to play a major role in promoting economic growth in India.

Q. 11) Comment on the consequences of environmental degradation on the

economy of a community.

Ans:- In the name of quick economic development in a very short period of time,
there is fast depletion of all kind of resources and many types of resources may
be exhausted in the near future. The destruction in eco-system has dangerous
and demoralizing effects on the economy. Degradation & destruction of
resources-base is unpardonable. They have adverse effects on health, efficiency
& quality of life of the people. Sustainable economic development seeks to meet
the needs and aspirations of the present without compromising the ability of
future generation to meet their own needs. Environmental damages may be in
the following categories. They are as follows –

I) Water Pollution:
The main water pollutants are disease – causing agent’s whish include
bacteria, viruses, protozoa etc. As industrial wastes are dumped in to the rivers &
lakes, water is contaminated and it can not be used for drinking purposes.
Billions of people are affected by water contamination in the world.
II) Air Pollution:
The air may become polluted by natural causes such as volcanoes, which
release ash, dust, sulphur, & other gases or by forest fire that are occasionally
naturally caused by lightening. There are carbon monoxide, sulfur oxides,
nitrogen oxides, hydrocarbons & particulars. The vehicles increased the sulfur
dioxide concentration in the air creating breathing problems for children and
affect their neurological developments.
III) Soil Pollution:
It arises as a result of excessive use of fertilizers, soil erosion and water
logging, dumping of garbage and other kinds of unused wastes.
IV) Deforestation:
There is terrific deforestation due to reckless industrialization and growth in
urban areas which is responsible for several problems. Like- soil erosion, affects
in hydrologic cycle, affect local and regional climate through evaporation, affect in
global climate and eco system also.

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V) Loss of Biodiversity:
 Biological diversity, a composite of genetic information, species and eco
system, all provide material wealth in the form of food, medicine and inputs to
industrial processes. Loss of biodiversity jeopardizes all this benefits.
VI) Solid and hazardous wastes:
Excessive quantities of solid wastes generation, inadequate collection and
unmanaged disposal etc present serious problems for human health and
productivity. Open dumping and uncontrolled land filling causes several types of
diseases and contributes for the spread of diseases. Solid and hazardous wastes
pollute ground water resources.
Thus, several factors have contributed for environmental degradation.

Q. 12) Write short notes on the following:

a) Stagflation.
b) Philips curve.

Ans:- Stagflation:
The present day inflation is the best explanation for stagflation in the whole
world. It is inflation accompanied by stagnation on the development front in an economy.
Instead of leading to full employment, inflation has resulted in un-employment in most of
the countries of the world. It is a global phenomenon today. Both developed and
developing countries are not free from its clutches.
Stagflation is a portmanteau term in macro economics used to describe a period
with a high rate of inflation combined with unemployment and economic recession.
Inflationary gap occurs when aggregate demand exceeds the available supply and
deflationary gap occurs when aggregate demand is less than the aggregate supply.
These are two opposite situations. For instance, when inflation goes unchecked for
some time, and price reach very high level, aggregate demand contracts and a slump
follows. Private investment is discouraged. Inflationary & deflationary pressures exist
simultaneously. The existence of an economic recession at the height of inflation is
called ‘stagflation’.
The effects of rising inflation and unemployment are especially hard to
counteract for the government and the central bank. If monetary and fiscal measures are
adopted to redress one problem, the other gets aggravated. Say, if a cheap money
policy & public works programme are adopted to remedy unemployment inflation gets
aggravated. On the other hand, if a dear money policy and stringent fiscal measures are
followed unemployment will get aggravated. It is the most difficult type of inflation that
the world is facing today. Keynesian remedial measures have not succeeded in
containing inflation but actually have aggravated unemployment. Thus, the world stands
today between the devil (inflation) and deep sea (unemployment).

Phillips Curve:
A.W.Phillips the British economist was the first to identify the inverse
relationship between the rate of unemployment and the rate of increase in money
wages. Phillips in his empirical study found that when unemployment was high, the rate
of increase in money wage rates was low; and when unemployment was low, the rate of
increase in money wage rates was high. Phillips calls it as the trade-off between
unemployment and money wages. This is illustrated in the figure below.

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 In the figure the horizontal axis represents the rate of unemployment and the vertical
axis represents the rate of money wages. In the figure PC represents the Phillips curve;
PC is sloping downwards and is convex to the origin of the two axes and cuts the
horizontal axis. The convexity of PC shows that money wages fall with increase in the
rate of unemployment or conversely money wages rise with decrease in the rate of
unemployment.
This inverse relationship between money wage rates and unemployment is
based on the nature of business activity. During the period of rising business activity
wage rate is high and the rate of unemployment is low and during period of declining
business activity rate is low and the rate of unemployment is high.